If you’ve been house-hunting in recent years, you’ve really been through it. Maybe you were waiting out the market, hoping the rocketing prices would start to flatten. Now, of course, they have — but between 2021 and 2022, mortgage rates have more than doubled, from less than 3 percent to nearly 7 percent.
The math on a 30-year, fixed-rate loan for a $600,000 house with a 10 percent down payment tells the tale: At a 4.0 percent interest rate, the monthly payment would be $2,500. At 7.0 percent, the payment is $1,100 higher, at $3,600.
“Every buyer needs to do a gut check” on how much house they can afford now, advises Patrick Holland, vice president at Embrace Home Loans in Fairfax, Va. So let’s get into some of the questions you may be asking yourself.
Do higher interest rates make it harder to qualify for a home loan?
In short, yes. Because higher interest rates mean your monthly mortgage payment will also be higher, the income required to qualify for a home loan goes up, too. When rates were 2.9 percent, for example, the average borrower needed an income of $133,450 to buy a $750,000 home with a 20 percent down payment, explains Hope Morgan, branch manager at Mortgage Network in Salisbury, Md. At a rate of 6.9 percent, that same loan would require an income of $195,700; the monthly payment would increase from $3,114 to $4,567.
Is it true that my housing payment should max out at 28 to 30 percent of my pretax income?
Financial experts frequently recommend keeping your housing payment within this range. But this is only a generalization. Depending on your personal circumstances, you may need to budget much less of your monthly income for housing to keep your finances under control. For instance, “you may have your kids in private school or have higher transportation costs,” says Isabel Barrow, director of financial planning for Edelman Financial Engines in Alexandria, Va. Barrow recommends breaking down your monthly expenses to truly determine how much you’ll need to stretch to afford the mortgage and whether you can cut down on discretionary spending.
At the end of the day, though, you’ll have to be honest with yourself: “If you now need $50,000 more in income to qualify for the house you thought you wanted, it may be that you need to find a less expensive house, wait for prices to come down, save more for a down payment or wait for a raise,” says Barrow.
Are you ready to search for a home in the Central Valley? If so, contact Valleywide Realty today by calling us at (209) 831-9747 or click here.